Legislature(2005 - 2006)HOUSE FINANCE 519

03/27/2006 02:00 PM FINANCE


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02:09:39 PM Start
02:31:12 PM HB488
04:55:15 PM Adjourn
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
+ HB 488 OIL AND GAS PRODUCTION TAX TELECONFERENCED
Heard & Held
-- Testimony <Invitation Only> --
Administration
+ Bills Previously Heard/Scheduled TELECONFERENCED
                  HOUSE FINANCE COMMITTEE                                                                                       
                       March 27, 2006                                                                                           
                         2:09 p.m.                                                                                              
                                                                                                                                
CALL TO ORDER                                                                                                                 
                                                                                                                                
Co-Chair Chenault called the House Finance Committee meeting                                                                    
to order at 2:09:39 PM.                                                                                                       
                                                                                                                                
MEMBERS PRESENT                                                                                                               
                                                                                                                                
Representative Mike Chenault, Co-Chair                                                                                          
Representative Kevin Meyer, Co-Chair                                                                                            
Representative Bill Stoltze, Vice-Chair                                                                                         
Representative Mike Hawker                                                                                                      
Representative Jim Holm                                                                                                         
Representative Reggie Joule                                                                                                     
Representative Mike Kelly                                                                                                       
Representative Richard Foster                                                                                                   
Representative Carl Moses                                                                                                       
Representative Bruce Weyhrauch                                                                                                  
                                                                                                                                
MEMBERS ABSENT                                                                                                                
                                                                                                                                
Representative Beth Kerttula                                                                                                    
                                                                                                                                
ALSO PRESENT                                                                                                                  
                                                                                                                                
Dan  Dickinson,  Consultant,   Tax  Division,  Department  of                                                                   
Revenue;   Robynn   Wilson,  Director,   Division   of   Tax,                                                                   
Department  of  Revenue; Roger  Marks,  Petroleum  Economist,                                                                   
Economic  Research  Section,   Tax  Division,  Department  of                                                                   
Revenue                                                                                                                         
                                                                                                                                
PRESENT VIA TELECONFERENCE                                                                                                    
                                                                                                                                
William Corbus, Commissioner, Department of Revenue                                                                             
                                                                                                                                
SUMMARY                                                                                                                       
                                                                                                                                
HB 488    "An Act repealing the oil production tax and gas                                                                      
          production  tax and providing for a  production tax                                                                   
          on the  net value of  oil and gas; relating  to the                                                                   
          relationship of the  production tax to other taxes;                                                                   
          relating to  the dates tax payments  and surcharges                                                                   
          are  due under  AS 43.55; relating  to interest  on                                                                   
          overpayments  under   AS  43.55;  relating  to  the                                                                   
          treatment  of  oil  and  gas production  tax  in  a                                                                   
          producer's  settlement   with  the  royalty  owner;                                                                   
          relating to flared gas,  and to oil and gas used in                                                                   
          the  operation of  a  lease or  property, under  AS                                                                   
          43.55; relating  to the prevailing value  of oil or                                                                   
          gas  under  AS  43.55; providing  for  tax  credits                                                                   
          against  the tax  due  under AS  43.55 for  certain                                                                   
          expenditures,  losses, and surcharges;  relating to                                                                   
          statements  or  other  information required  to  be                                                                   
          filed  with  or  furnished  to  the  Department  of                                                                   
          Revenue,  and relating to  the penalty  for failure                                                                   
          to file  certain reports, under AS  43.55; relating                                                                   
          to the powers of the  Department of Revenue, and to                                                                   
          the disclosure  of certain information  required to                                                                   
          be  furnished to the  Department of Revenue,  under                                                                   
          AS  43.55;  relating   to  criminal  penalties  for                                                                   
          violating  conditions governing  access to  and use                                                                   
          of  confidential information  relating  to the  oil                                                                   
          and gas production tax;  relating to the deposit of                                                                   
          money collected by the  Department of Revenue under                                                                   
          AS 43.55; relating to  the calculation of the gross                                                                   
          value  at the point  of production  of oil  or gas;                                                                   
          relating to  the determination of the  net value of                                                                   
          taxable  oil and gas  for purposes of  a production                                                                   
          tax on  the net value  of oil and gas;  relating to                                                                   
          the definitions of 'gas,'  'oil,' and certain other                                                                   
          terms for  purposes of AS 43.55;  making conforming                                                                   
          amendments; and providing for an effective date."                                                                     
                                                                                                                                
          HB 488 was heard and  HELD in Committee for further                                                                   
          consideration.                                                                                                        
                                                                                                                                
HOUSE BILL NO. 488                                                                                                            
                                                                                                                                
     "An  Act  repealing  the  oil  production  tax  and  gas                                                                   
     production  tax and  providing for  a production  tax on                                                                   
     the  net  value   of  oil  and  gas;  relating   to  the                                                                   
     relationship  of  the  production  tax to  other  taxes;                                                                   
     relating to  the dates tax  payments and  surcharges are                                                                   
     due   under   AS   43.55;  relating   to   interest   on                                                                   
     overpayments under  AS 43.55; relating to  the treatment                                                                   
     of  oil   and  gas  production   tax  in   a  producer's                                                                   
     settlement  with the royalty  owner; relating  to flared                                                                   
     gas,  and to  oil and  gas used  in the  operation of  a                                                                   
     lease  or  property, under  AS  43.55; relating  to  the                                                                   
     prevailing  value   of  oil  or  gas  under   AS  43.55;                                                                   
     providing for  tax credits against the tax  due under AS                                                                   
     43.55 for certain expenditures,  losses, and surcharges;                                                                   
     relating to statements or  other information required to                                                                   
     be  filed  with  or  furnished   to  the  Department  of                                                                   
     Revenue,  and relating  to  the penalty  for failure  to                                                                   
     file certain  reports, under  AS 43.55; relating  to the                                                                   
     powers  of  the  Department   of  Revenue,  and  to  the                                                                   
     disclosure  of   certain  information  required   to  be                                                                   
     furnished to the Department  of Revenue, under AS 43.55;                                                                   
     relating to criminal penalties  for violating conditions                                                                   
     governing access to and use  of confidential information                                                                   
     relating to the oil and gas  production tax; relating to                                                                   
     the  deposit of  money collected  by  the Department  of                                                                   
     Revenue under  AS 43.55; relating to the  calculation of                                                                   
     the gross  value at  the point of  production of  oil or                                                                   
     gas; relating  to the determination of the  net value of                                                                   
     taxable oil and gas for purposes  of a production tax on                                                                   
     the  net  value   of  oil  and  gas;  relating   to  the                                                                   
     definitions  of 'gas,'  'oil,' and  certain other  terms                                                                   
     for purposes of AS 43.55;  making conforming amendments;                                                                   
     and providing for an effective date."                                                                                      
                                                                                                                                
Co-Chair Meyer  declared a conflict of interest  regarding HB
488, citing his  background with the oil industry.   Co-Chair                                                                   
Chenault   objected  and   requested   that  Co-Chair   Meyer                                                                   
participate and vote on the bill.                                                                                               
                                                                                                                                
Representative Hawker  also declared a conflict  of interest,                                                                   
citing his wife's  occupation with an oil company.   Co-Chair                                                                   
Meyer  objected  and  requested  that  Representative  Hawker                                                                   
participate and vote on the bill.                                                                                               
                                                                                                                                
Co-Chair  Chenault  also  declared  a  conflict  of  interest                                                                   
because of  his construction  company's involvement  with oil                                                                   
companies.     Representative  Foster  objected.     Co-Chair                                                                   
Chenault responded that he would  participate and vote on the                                                                   
bill.                                                                                                                           
                                                                                                                                
Co-Chair Chenault  stated that the bill before  the committee                                                                   
is the House Resources Committee  Substitute (CS) for HB 488.                                                                   
                                                                                                                                
ROBYNN  WILSON,  DIRECTOR,  DIVISION OF  TAX,  DEPARTMENT  OF                                                                   
REVENUE introduced Commissioner Corbus.                                                                                         
                                                                                                                                
WILLIAM CORBUS,  COMMISSIONER,  DEPARTMENT OF REVENUE,  noted                                                                   
that he  was representing the  administration and  its strong                                                                   
support for  the Petroleum Profits  Tax (PPT).  HB  488 would                                                                   
replace the broken Economic Limit  Factor (ELF) severance tax                                                                   
system, provide  incentives for badly needed  investment, and                                                                   
provide special incentives for  small companies to explore in                                                                   
Alaska at  higher prices.   He commended the  House Resources                                                                   
Committee for  their hard  work on the  bill.  He  noted that                                                                   
the  CS supports  a  20 percent  tax  rate as  well  as a  20                                                                   
percent tax credit investment rate.                                                                                             
                                                                                                                                
Commissioner   Corbus   clarified  why   the   administration                                                                   
supports  the 20/20 tax.   At  present Trans-Alaska  Pipeline                                                                   
System  (TAPS)  is  operating  at  less  than  a  50  percent                                                                   
capacity.  Oil production was  once 2 million barrels per day                                                                   
and is  now about  870,000 barrels  per day.   By 2016  it is                                                                   
projected to be  772,000 barrels per day.   Recent production                                                                   
has  been inadequate  and  discourages  new investment.    He                                                                   
emphasized  that the state's  wealth must  be maximized  over                                                                   
the long run.                                                                                                                   
                                                                                                                                
Commissioner  Corbus explained  how  a 20/20  tax rate  would                                                                   
look.  If oil  was $40 per barrel, an equivalent  of about $7                                                                   
gas, and the prices remained uninflated,  revenues from a gas                                                                   
line  would be  about $2  billion per  year for  the next  35                                                                   
years.    Prudhoe  Bay's  life would  be  extended  at  least                                                                   
through 2050.                                                                                                                   
                                                                                                                                
Commissioner Corbus addressed  the 25/20 tax proposal.  Under                                                                   
this plan  there would be no  gas line and a  shortened field                                                                   
life at  Prudhoe Bay.   About  $200 million  would be  earned                                                                   
annually until the year 2030.                                                                                                   
                                                                                                                                
Commissioner Corbus  referred to the  changes made to  the CS                                                                   
by  the House  Resources Committee.   He  suggested that  the                                                                   
House Finance  Committee carefully scrutinize  these changes:                                                                   
one, the removal  of the transition provision,  two, changing                                                                   
the effective  date, and three,  the introduction of  the ELF                                                                   
factor.  In conclusion, the administration  strongly supports                                                                   
HB 488 with the 20/20 tax proposal.                                                                                             
                                                                                                                                
DAN  DICKINSON,   DIRECTOR,  TAX   DIVISION,  DEPARTMENT   OF                                                                   
REVENUE, referred  to a  handout entitled "Petroleum  Profits                                                                   
Tax  (PPT)" (copy  on  file.) He  began  his presentation  by                                                                   
discussing  the  governor's three  big  ideas:   the  current                                                                   
production tax system  is broken, there is a need  to use the                                                                   
tax system to  encourage investment, and Alaska  ought to get                                                                   
a  fair  share   of  tax  revenues  when  prices   are  high,                                                                   
especially if reinvestment is low.                                                                                              
                                                                                                                                
Mr. Dickinson  related that the House Resources  CS addresses                                                                   
the  three  ideas  by  replacing   the  old  tax  system,  by                                                                   
providing incentives  for investment,  and by preserving  the                                                                   
governor's 20/20 structure.                                                                                                     
                                                                                                                                
Mr. Dickinson addressed idea one  - the current tax system is                                                                   
broken.   He  repeated  that Alaska  is  neither getting  the                                                                   
investment needed,  nor a fair share of revenues  when prices                                                                   
are high  and investment is low.   Mr. Dickinson  referred to                                                                   
Slide  5 to  show  the  state's unrestricted  and  restricted                                                                   
revenue and  how the  severance tax  fits into that  picture.                                                                   
Of the  $3.4 billion of oil,  about $2.8 is  unrestricted and                                                                   
forms 88 percent of the general fund budget.                                                                                    
                                                                                                                                
Mr. Dickinson reported  that Slide 6 shows how  the petroleum                                                                   
revenue is broken down.  The largest  piece is royalties (and                                                                   
should   be  labeled   unrestricted),   which   in  FY   2005                                                                   
constituted  about  $1.4 billion.    The smallest  slice  was                                                                   
property tax, which  was about $42.5 million.   He noted that                                                                   
the production tax,  $863.2 million, is the  focus of today's                                                                   
presentation.  The proposed tax  would only affect production                                                                   
tax and none of the other components.                                                                                           
                                                                                                                                
2:31:12 PM                                                                                                                    
                                                                                                                                
Mr. Dickinson  related that Slide  7 depicts the  destination                                                                   
value at  the market in  2005.  He  used 330 million  barrels                                                                   
per year  as the volume at  $43.43 per barrel to  yield about                                                                   
$14 billion.  He deducted the  cost of infrastructure to find                                                                   
the  gross  value  at  the point  of  production.    He  then                                                                   
subtracted the upstream costs  to obtain the net value at the                                                                   
point  of  production,  which  in  this  example  is  $10,694                                                                   
million.  This  is the value that would be split  between the                                                                   
state, the federal government, and the oil companies.                                                                           
                                                                                                                                
2:33:03 PM                                                                                                                    
                                                                                                                                
Slide  8  addresses  what  would  happen  under  the  current                                                                   
production  tax.   He started  with  the gross  value at  the                                                                   
point  of  production,  subtracted   the  royalty  rate,  and                                                                   
multiplied by ELF.   Currently, there is a high  ELF on three                                                                   
fields:  Prudhoe Bay,  North  Star, and  Alpine.   All  other                                                                   
fields have  an ELF of zero.   He explained that  the average                                                                   
ELF  rate on  the North  Slope was  .55, as  depicted in  the                                                                   
slide.  The tax under this scenario equals $927 million.                                                                        
                                                                                                                                
Mr. Dickinson  explained how  the ELF  was supposed  to work.                                                                   
As a  proxy the ELF  is not working.   Slide 9  depicts this.                                                                   
Mr.  Dickinson pointed  out  that ELF  has  exponents and  is                                                                   
driven by, and is sensitive to, volume.                                                                                         
                                                                                                                                
Slide 10 shows  what happened at Kuparuk, the  second largest                                                                   
oil  field  in  the United  States,  when  well  productivity                                                                   
declined.    Because   productivity  was  so   low,  the  ELF                                                                   
decreased  to zero.   The  volume fell  and costs  increased.                                                                   
The  graph  shows that  the  severance  tax  is not  what  is                                                                   
affecting the barrels.                                                                                                          
                                                                                                                                
2:38:33 PM                                                                                                                    
                                                                                                                                
Slide 11  depicts the decline of  ELF.  Prudhoe Bay  is high,                                                                   
but  the smaller  fields  have  declined dramatically.    Mr.                                                                   
Dickinson stated that this situation needs to be fixed.                                                                         
                                                                                                                                
Slide  12 shows  what  is happening  in  the  North Slope  of                                                                   
Alaska, especially  the decline in Prudhoe Bay.   The ELF tax                                                                   
system was  focused on a  large field  and does not  work for                                                                   
small fields.                                                                                                                   
                                                                                                                                
Ms. Wilson focused on the second  point of the presentation -                                                                   
the need to use the tax system  to encourage investment.  She                                                                   
pointed out that  investment leads to more  production, which                                                                   
leads  to  more   revenue.    She  discussed   four  ways  of                                                                   
encouraging investment:  net vs. gross - all  investment is a                                                                   
deduction, 20 percent credits  for capital investments, up to                                                                   
a  $73   million   annual  allowance,   and  recognition   of                                                                   
transition investment expenditures.                                                                                             
                                                                                                                                
2:43:17 PM                                                                                                                    
                                                                                                                                
Ms. Wilson explained  how the CS addresses the  previous four                                                                   
points.   It  preserves  the net  vs.  gross  idea where  all                                                                   
investment  is a  deduction.   It  preserves  the 20  percent                                                                   
credit for  capital investments, has  a feature like  the $73                                                                   
million annual allowance, and  reduces the 5 years transition                                                                   
investment expenditures period to 3 months.                                                                                     
                                                                                                                                
Ms. Wilson  stated that the  new CS  provides a tax  based on                                                                   
net  profits  like the  governor's  bill  did.   She  further                                                                   
explained  the  gross vs.  net  concept  in  Slide 17.    She                                                                   
compared the current  tax based on gross to the  PPT based on                                                                   
net.                                                                                                                            
                                                                                                                                
Ms. Wilson  clarified  that tax  base is gross  value at  the                                                                   
point of  production.  She  explained how the  wellhead value                                                                   
is determined under the current system.                                                                                         
                                                                                                                                
2:47:07 PM                                                                                                                    
                                                                                                                                
Ms. Wilson  pointed out  in Slide 20  that the Department  of                                                                   
Revenue  can allow  a producer  to elect the  use of  royalty                                                                   
value or  a Department  of Revenue  formula that estimates  a                                                                   
value at  a specific  location, such as  a point  of delivery                                                                   
into a common carrier pipeline.                                                                                                 
                                                                                                                                
Ms.  Wilson  explained  the  tax  based  on  net  profits  as                                                                   
depicted  in Slide  21.   The  gross value  at  the point  of                                                                   
production, less the lease expenditures,  which are operating                                                                   
costs,  capital  expenditures,  and allowance  for  overhead,                                                                   
equals net profits.                                                                                                             
                                                                                                                                
2:51:00 PM                                                                                                                    
                                                                                                                                
Ms.    Wilson    listed    the    non-deductible    expenses:                                                                   
depreciation,  royalty payments, taxes  based on  net income,                                                                   
interest and financing charges,  lease acquisition costs, and                                                                   
other costs such as arbitration,  donation, and partnerships.                                                                   
The intent is  to separate things that are  applicable to the                                                                   
lease from things that are not.                                                                                                 
                                                                                                                                
2:52:56 PM                                                                                                                    
                                                                                                                                
Ms.  Wilson  explained  that  the  governor's  bill  included                                                                   
credits  to   encourage  investment.     Twenty   percent  of                                                                   
qualified capital  expenditures may  be taken on  exploration                                                                   
costs  and on capital  costs incurred  on the  lease.   These                                                                   
credits  are transferable.    She  explained  the process  of                                                                   
transferring credits.                                                                                                           
                                                                                                                                
Ms. Wilson  related that  the CS  maintains the credits,  but                                                                   
also allows the state to purchase  up to $10 million worth of                                                                   
credits.  Credits may not be taken on abandonment costs.                                                                        
                                                                                                                                
Ms. Wilson  noted that the CS  is friendly to  new investors.                                                                   
It  has the  ability  to monetize  credits  and  losses.   It                                                                   
provides for  a base allowance  and converts the  $73 million                                                                   
deduction to  a credit of up  to $12 million, which  is equal                                                                   
to a $60 million deduction.                                                                                                     
                                                                                                                                
2:57:16 PM                                                                                                                    
                                                                                                                                
Ms.  Wilson  pointed  out  examples  of  the  effect  of  the                                                                   
standard  credit  in Slide  26.    Ms. Wilson  discussed  net                                                                   
operating  losses  and  how  they  are  handled.    Slide  27                                                                   
clarifies that net  operating loss (NOL) can  be converted to                                                                   
credits at the  end of the year at the rate  of 20 percent of                                                                   
the loss.                                                                                                                       
                                                                                                                                
3:00:43 PM                                                                                                                    
                                                                                                                                
Ms.  Wilson  highlighted  the   transition  provision.    The                                                                   
governor's  bill   allowed  deductions  for   recent  capital                                                                   
expenditures from  the last five years, allowed  over 6 years                                                                   
when the price of oil exceeded $40.                                                                                             
                                                                                                                                
Ms.  Wilson addressed  the transition  provision  in the  CS,                                                                   
which allows for a cost recovery  of assets placed in service                                                                   
between 1/1/06-3/31/06.   A deduction  of 1/9 of the  cost in                                                                   
each of  the 9 months  after the  effective date  is allowed.                                                                   
This is  in place  of a  5-year look  back in the  governor's                                                                   
bill.                                                                                                                           
                                                                                                                                
3:04:09 PM                                                                                                                    
                                                                                                                                
Mr.  Dickinson addressed  idea three  - Alaska  should get  a                                                                   
fair share of  tax revenues when prices are  high, especially                                                                   
if  reinvestment  is low.    The  governor's  bill had  a  20                                                                   
percent fair tax  rate.  The CS maintains a  general tax rate                                                                   
of  20  percent   and  adds  a  progressive   feature.    The                                                                   
progressivity surcharge applies  when oil price (WTI) exceeds                                                                   
$50/bbl and  the gas  surcharge applies  when gas price  (HH)                                                                   
exceeds $8.  This is deductible  from PPT.  The progressivity                                                                   
surcharge adds  3 percent  tax, based on  the gross  value of                                                                   
oil, for each $10  increase in oil price.  The  gas surcharge                                                                   
adds a  2 percent tax  based on the  gross value of  gas, for                                                                   
each $1 increase in HH gas price.                                                                                               
                                                                                                                                
Mr.   Dickinson  explained   Slide   36,   which  shows   the                                                                   
progressivity feature, as amended in the CS.                                                                                    
                                                                                                                                
3:09:06 PM                                                                                                                    
                                                                                                                                
Mr.  Dickinson   further  clarified  how   the  progressivity                                                                   
feature  works  on  Slide  37.     Slide  38  shows  how  the                                                                   
calculation works under the House  Resources CS.  Slide 39 is                                                                   
a  continuation  of  the  calculation  of  the  progressivity                                                                   
feature.    He  stated  that this  feature  is  an  important                                                                   
distinction from the governor's version of the bill.                                                                            
                                                                                                                                
3:13:38 PM                                                                                                                    
                                                                                                                                
Ms.  Wilson  addressed  other provisions  in  the  governor's                                                                   
bill,  which  include  monthly   return  filing,  90  percent                                                                   
payment safe harbor, and a yearly true-up on 3/31.                                                                              
                                                                                                                                
Ms. Wilson noted  other provisions in the CS.   The spill fee                                                                   
remains the  same in total.   It is no longer  creditable, as                                                                   
in the governor's bill.                                                                                                         
                                                                                                                                
3:15:59 PM                                                                                                                    
                                                                                                                                
Ms. Wilson addressed other provisions  in the CS.  The SB 185                                                                   
40 percent  credits are extended  for 10 years.   The private                                                                   
royalty  oil tax  rate  is set  at 5  percent  and a  penalty                                                                   
applies  if the  90  percent safe-harbor  is  not  met.   The                                                                   
effective date change is from 7/1/06 to 4/1/06.                                                                                 
                                                                                                                                
Ms. Wilson  concluded that PPT  is a tax for  Alaska's future                                                                   
because  it  would ensure  Alaska's  competitiveness  in  the                                                                   
world market, it would have high  oil development incentives,                                                                   
it  would increase  Alaska's share  at high  oil prices,  and                                                                   
give a fair split of oil company profits.                                                                                       
                                                                                                                                
3:18:06 PM                                                                                                                    
                                                                                                                                
Co-Chair Meyer  asked for clarification about  the 90 percent                                                                   
safe harbor.   Ms. Wilson  explained that estimates  are used                                                                   
on a monthly  basis.  Rather  than have the producer  pay the                                                                   
full amount,  a safe  harbor of  90 percent  is paid  without                                                                   
interest or penalty.                                                                                                            
                                                                                                                                
Co-Chair Meyer  referred to a "two-for-one" term  used during                                                                   
discussion of  a Senate bill.   Mr. Dickinson  clarified that                                                                   
for every dollar  reclaimed from five years  of expenses, two                                                                   
dollars need to be spent during  the recapture period.  There                                                                   
needs to be a continual investor.                                                                                               
                                                                                                                                
Co-Chair  Meyer  asked  about the  objective  of  continually                                                                   
investing and whether  progressivity would work.   He gave an                                                                   
example.  Mr. Dickinson questioned  if that would incentivize                                                                   
more  investment.   He  opined  that  there  would not  be  a                                                                   
significant  difference  for  small amounts  by  raising  the                                                                   
marginal rate.  He said it was a possibility.                                                                                   
                                                                                                                                
3:22:27 PM                                                                                                                    
                                                                                                                                
Co-Chair Meyer  asked if  the credit would  go up  along with                                                                   
the  price  of  oil.   Mr.  Dickinson  did  not  recall  that                                                                   
discussion.                                                                                                                     
                                                                                                                                
Representative   Holm  asked  why   higher  prices   are  not                                                                   
sufficient  incentive  for  more  capital  investment.    Mr.                                                                   
Dickinson replied  that when oil  prices are high,  all areas                                                                   
are equally  incentivized.  Alaska  would be competing  for a                                                                   
company's investment  dollars.  PPT is trying  to make Alaska                                                                   
competitive.   Representative  Holm he  asked why Alaska  has                                                                   
not seen a tripling  of investment when prices are  high.  He                                                                   
said he  is not convinced that  this CS will  incentivize oil                                                                   
companies  to invest  if high  oil prices don't  do the  same                                                                   
thing.                                                                                                                          
                                                                                                                                
Mr. Dickinson  responded  that some companies  are going  out                                                                   
and  exploring when  prices are  high.   Other companies  are                                                                   
bringing known  fields on line.   The bill intends  to change                                                                   
Alaska relative  to other oil fields  in the world.   The tax                                                                   
situation  now  is   unique  in  that  it  does   not  create                                                                   
reinvestment.    The  current   fiscal  system  is  partially                                                                   
responsible for lack of investment in Alaska.                                                                                   
                                                                                                                                
3:28:23 PM                                                                                                                    
                                                                                                                                
Co-Chair   Chenault  asked  what   the  normal   depreciation                                                                   
schedule on oil production equipment  is.  He referred to the                                                                   
"claw back"  noting that  the depreciation  has already  been                                                                   
taken.     Ms.  Wilson   replied  that  depreciation   varies                                                                   
depending on the  type of equipment.  She gave  the range for                                                                   
various  types.    The  general   schedule  is  7  years  for                                                                   
exploration and production equipment.                                                                                           
                                                                                                                                
Co-Chair  Chenault thought  that  there would  be a  pro-rata                                                                   
agreement  and  noted  that 5  years  of  appreciation  would                                                                   
already be taken  off.  He questioned why 100  percent should                                                                   
be written  off for depreciation.   Ms. Wilson  observed that                                                                   
the  five-year  look  back reflects  the  governor's  choice,                                                                   
which is only one option.                                                                                                       
                                                                                                                                
3:32:00 PM                                                                                                                    
                                                                                                                                
Representative  Weyhrauch asked  why the  $73 million  figure                                                                   
was selected.   Ms. Wilson responded  that it was  the choice                                                                   
of  the  governor and  amounts  to  $200,000  per day.    Mr.                                                                   
Dickinson  further explained  that  $40 dollar  oil at  5,000                                                                   
barrels a day would amount to $73 million.                                                                                      
                                                                                                                                
Representative   Weyhrauch   referred   to  Slide   36,   the                                                                   
progressivity  feature, as  amended, and  asked about  a $150                                                                   
per barrel  scenario.   Mr. Dickinson  replied that  $150 was                                                                   
the number  in the original CS,  which was then amended.   He                                                                   
clarified   what    the   lines   in   the    graph   depict.                                                                   
Representative  Weyhrauch  requested  information  about  the                                                                   
progressivity  feature in writing.   Mr. Dickinson  responded                                                                   
that he does not have that available.                                                                                           
                                                                                                                                
3:35:08 PM                                                                                                                    
                                                                                                                                
Representative Weyhrauch  questioned if one of  the big ideas                                                                   
is to lay  the base for  gas line investment.   Mr. Dickinson                                                                   
agreed that  the result would  affect the gas  line proposal,                                                                   
but suggested that PPT would stand on its own.                                                                                  
                                                                                                                                
Representative   Weyhrauch  referred   to  ways  to   measure                                                                   
reinvestment and  questioned if it would be  quantified.  Mr.                                                                   
Dickinson  agreed that  it  would make  sense  to review  the                                                                   
affects on reinvestment.                                                                                                        
                                                                                                                                
3:37:13 PM                                                                                                                    
                                                                                                                                
Representative Holm asked for  the number of barrels produced                                                                   
in 2016.  He thought  that the  reduction was  minimal.   Mr.                                                                   
Dickinson  estimated that  the  production in  2016 would  be                                                                   
700,000 barrels a day.                                                                                                          
                                                                                                                                
Representative Holm questioned  why the urgency, if the field                                                                   
is not dropping  quickly.  Mr. Dickinson observed  that there                                                                   
is an  urgency for investment  because it  takes 5 -  6 years                                                                   
for investment  to come to term.   He added that  the current                                                                   
values would drop if the production were not leveled.                                                                           
                                                                                                                                
Representative  Holm summarized  that there  would not  be an                                                                   
increase,  since   it  would  take  5  years.   The  drop  in                                                                   
production  would  offset  the additional  investment.    Mr.                                                                   
Dickinson agreed.                                                                                                               
                                                                                                                                
3:41:39 PM                                                                                                                    
                                                                                                                                
Representative  Hawker referred  to  the governor's  proposal                                                                   
and  noted that  the committee  substitute  would change  the                                                                   
implementation date  to six months.   He questioned  if there                                                                   
were sufficient  time to  form regulations.   He asked  if it                                                                   
would  be better  to  have regulations  in  place before  the                                                                   
taxpayers were asked to comply.                                                                                                 
                                                                                                                                
Ms.  Wilson  noted  that  there   is  a  provision  to  allow                                                                   
regulations  to be put  in place.   The fiscal note  reflects                                                                   
built-in expenditures  to get  regulations out quickly.   She                                                                   
acknowledged that it is not an  ideal situation.  She did not                                                                   
think the effective  date would be worse than  the governor's                                                                   
date, in terms of administration.                                                                                               
                                                                                                                                
3:44:25 PM                                                                                                                    
                                                                                                                                
Representative  Hawker questioned  the  amount of  regulation                                                                   
needed  to implement  this bill.   Ms.  Wilson thought  there                                                                   
would be  a fair  amount of  regulation regarding  allocation                                                                   
and overhead.   Mr. Dickinson  added that the CS  would allow                                                                   
the  first  six month's  payments  to  be  based on  the  old                                                                   
                th                                                                                                              
formula.   The 7   payment would  have to  "true up"  for the                                                                   
       th                                                                                                                       
first 6   months, with no interest  and no penalties.   There                                                                   
is urgency  by the State  of Alaska to  put the new  terms in                                                                   
place while  oil prices are  high.  He  added that  there are                                                                   
two  aids  which  will help  when  writing  regulations:  one                                                                   
allows work that Department of  Natural Resources has already                                                                   
done, and the other  is to accept the agreements  that are in                                                                   
place on the North Slope.  He  observed that there is a group                                                                   
that audits  monthly bills, and the  hope is to rely  on that                                                                   
current  agreement.   The fiscal note  provides for  contract                                                                   
work  to set  regulations.   There are  firms that  represent                                                                   
small producers and  the intent is to bring them  on board to                                                                   
help write regulations.                                                                                                         
                                                                                                                                
3:48:32 PM                                                                                                                    
                                                                                                                                
Representative Hawker stated that  internal auditing of joint                                                                   
structures might  not get to the problem, because  they would                                                                   
be writing regulations for which they are accountable.                                                                          
                                                                                                                                
Representative  Hawker referred  to  the progressivity  chart                                                                   
and observed that there is a huge  "jump up break point".  He                                                                   
asked   if  there  were   other  mechanisms   to  achieve   a                                                                   
progressive  structure.   Mr. Dickinson  observed that  there                                                                   
are other models, but that this one is fairly typical.                                                                          
                                                                                                                                
Representative  Hawker  declared that  he  did  not have  the                                                                   
economic background  to analyze  the various approaches.   He                                                                   
questioned if  the administration  and other committees  have                                                                   
the  ability and  resources to  analyze models  other than  a                                                                   
surtax  model.    Mr. Dickinson  responded  that  they  would                                                                   
continue to do that.                                                                                                            
                                                                                                                                
Representative  Hawker  noted that  the  governor proposed  a                                                                   
flat  tax.   He  questioned  if  the administration  has  the                                                                   
resources  to  "flush out"  a  credit  system  as well  as  a                                                                   
revenue system.  Mr. Dickinson stated that they did.                                                                            
                                                                                                                                
3:53:00 PM                                                                                                                    
                                                                                                                                
Representative  Hawker referred to  the mechanism  for annual                                                                   
monthly payments  to provide  90 percent over  the year.   He                                                                   
questioned if the House Resources  CS would subject payees to                                                                   
a  penalty if  they did  not make  sufficient  payment.   Ms.                                                                   
Wilson  observed that  the CS  provides a penalty  if the  90                                                                   
percent is not met.  Mr. Dickinson  added that unless payment                                                                   
was 90 percent  or over, there would be a  penalty provision.                                                                   
This is not the case in the status quo.                                                                                         
                                                                                                                                
Representative  Hawker referred  to Slide  26, the effect  of                                                                   
the standard credit.   He asked if he invests  $5 million, if                                                                   
he would  receive a benefit of  $6 million.  Ms.  Wilson said                                                                   
that  is  correct.     He  added  that  for   a  $12  million                                                                   
investment, the investor would  receive a $14.4 benefit.  Ms.                                                                   
Wilson agreed.                                                                                                                  
                                                                                                                                
3:57:07 PM                                                                                                                    
                                                                                                                                
Representative  Kelly referred  to Slide 10  on Kuparuk.   He                                                                   
asked  how much  the  state lost  from  not anticipating  the                                                                   
Kuparuk  curve.    Mr.  Dickinson agreed  to  find  out  that                                                                   
information.   Representative Kelly wondered if  a comparison                                                                   
was done  on the 20/20 regarding  progressivity.   Ms. Wilson                                                                   
observed  that  the  comparisons   were  done  and  would  be                                                                   
provided in the next presentation.                                                                                              
                                                                                                                                
Representative Kelly asked if  there are other models to look                                                                   
at.   He inquired  about other possible  safety nets  such as                                                                   
ELF.   Mr. Dickinson  offered to provide  other models.   Mr.                                                                   
Dickinson  explained that  the  floor is  a cash-flow  issue.                                                                   
Neither the original bill nor the CS has that provision.                                                                        
                                                                                                                                
Ms.  Wilson  encouraged  the  members  to  write  down  their                                                                   
questions.                                                                                                                      
                                                                                                                                
4:03:54 PM                                                                                                                    
                                                                                                                                
Representative Hawker  said he looks forward  to flushing out                                                                   
some progressivity mechanisms.                                                                                                  
                                                                                                                                
Representative  Joule  commented on  Slide  40 regarding  the                                                                   
effective date and the claw back.   He wondered why the state                                                                   
does  not  have  a  claw  back.     Mr.  Dickinson  spoke  to                                                                   
investment expectations and the  dangers of a situation where                                                                   
there is no transition provision.                                                                                               
                                                                                                                                
Ms. Wilson  noted that  the sponsor  statement contains  some                                                                   
errors that need to be corrected.                                                                                               
                                                                                                                                
4:07:20 PM                                                                                                                    
                                                                                                                                
ROGER MARKS, PETROLEUM ECONOMIST,  ECONOMIC RESEARCH SECTION,                                                                   
TAX DIVISION,  DEPARTMENT OF REVENUE, presented  quantitative                                                                   
analysis  as  shown  in  a  handout   entitled  "PPT  Revenue                                                                   
Studies" (copy on file.)                                                                                                        
                                                                                                                                
Mr.  Marks  referred  to  Slide 5  to  show  the  progressive                                                                   
surcharge  using West  Texas Intermediate  (WTI) prices.   He                                                                   
pointed out  the "jump up" that  occurs at $110.01,  which is                                                                   
of concern.  Slides 6 and 7 shows  WTI and Arctic North Slope                                                                   
(ANS) differential from Jan. 1988 - Feb. 2006.                                                                                  
                                                                                                                                
4:11:20 PM                                                                                                                    
                                                                                                                                
Mr. Marks depicted  two volume scenarios on Slide  9.  One is                                                                   
without enhanced  volume and  no gas line,  the other  with a                                                                   
gas line and enhanced  volumes.  With a gas  line there would                                                                   
be an additional 3.1 billion barrels  of conventional oil and                                                                   
1.7  billion  barrels  of  heavy  oil.   In  the  low  volume                                                                   
scenario, there  would be 5.7  billion barrels  through 2030.                                                                   
The graph on Slide 10 depicts these two scenarios.                                                                              
                                                                                                                                
Mr.  Marks   related  costs  and   prices  relating   to  the                                                                   
production tax.   Slide 11  lists the various  costs, prices,                                                                   
and revenues in real $2005 dollars.   Heavy oil is discounted                                                                   
8  percent  for quality.    It  is predicted  that  ten  full                                                                   
company  equivalents  would  take   the  $12  million  credit                                                                   
allowance.                                                                                                                      
                                                                                                                                
4:19:09 PM                                                                                                                    
                                                                                                                                
Mr. Marks  addressed the original  intent of the  $73 million                                                                   
allowance.   Small  companies  would explore  new areas  with                                                                   
this incentive.   The  House Resources CS  changes this  to a                                                                   
$12 million credit.                                                                                                             
                                                                                                                                
4:20:51 PM                                                                                                                    
                                                                                                                                
Mr. Marks  addressed the  feedback effects  not modeled.   He                                                                   
shared  several  tendencies  such as  production  depends  on                                                                   
investment.   There is  more investment  with incentives  and                                                                   
credits are  incentives.  Upstream  costs cannot  be deducted                                                                   
currently.    Credits  can be sold  or converted,  which will                                                                   
increase  net investment.   There are  more investments  with                                                                   
higher  prices,  and  less  investment   with  higher  taxes.                                                                   
Investment   is    driven   by   competitive    international                                                                   
opportunities.                                                                                                                  
                                                                                                                                
4:24:21 PM                                                                                                                    
                                                                                                                                
Mr.  Marks  discussed cumulative  revenues  without  enhanced                                                                   
volumes/without gas  line and with enhanced  volumes/with gas                                                                   
line.   Enhanced  volume scenarios  do not  include gas  line                                                                   
severance  taxes, but do  include gas  line costs.   Upstream                                                                   
development costs are deductible.                                                                                               
                                                                                                                                
4:26:19 PM                                                                                                                    
                                                                                                                                
Mr. Marks  referred to  Slide 14  - cumulative severance  tax                                                                   
from  2006-2030,  low  volume   scenario.    The  low  volume                                                                   
scenario  does not  include the  gas line.   He related  that                                                                   
what  is  deductible   under  PPT  are  upstream   costs  for                                                                   
producing oil and gas.  Downstream  costs are not deductible.                                                                   
Severance taxes from gas are not  included.  The stranded gas                                                                   
contract is  separate from the PPT  bill.  A $5 price  of gas                                                                   
in Chicago  would equal an  extra $1  billion a year  over 35                                                                   
years.                                                                                                                          
                                                                                                                                
He addressed  the  low volume  scenario from  $15 to $65  ANS                                                                   
West Coast  Price bbl.   He compared  the governor's  bill to                                                                   
the House CS and the status quo.                                                                                                
                                                                                                                                
Slide 15  shows the crossover  point and slope of  two plans.                                                                   
He suggested that the slope is  as important as the crossover                                                                   
point.   Slide 16 addresses the  high volume scenario  of the                                                                   
cumulative severance  tax.  It  compares the governor's  bill                                                                   
and the House CS.                                                                                                               
                                                                                                                                
4:31:48 PM                                                                                                                    
                                                                                                                                
Mr.  Marks  expounded  on annual  revenues  without  enhanced                                                                   
volumes/without  gas line  and  with gas  line/with  enhanced                                                                   
volumes.                                                                                                                        
                                                                                                                                
Representative  Holm stated  that the  gas line  in the  high                                                                   
volume scenario  has no money for  20 percent "in kind".   He                                                                   
asked if it  is assumed that there would be  participation in                                                                   
"in kind" if a  gas line goes in.  Mr. Marks  agreed but said                                                                   
it would be  distinct from PPT.   A percent of gas  "in kind"                                                                   
would be taken  outside of the 20 percent PPT.   With the gas                                                                   
line there would be additional oil barrels.                                                                                     
                                                                                                                                
Mr. Marks continued to show the  low volume scenario on Slide                                                                   
18.   The status  quo averages  $116 million  annually.   The                                                                   
average  annual  revenues  are  $100 million  less  than  the                                                                   
status  quo.  At  $20 oil  prices there  are bigger  problems                                                                   
under  the status  quo.  Obsessing  about low  prices is  not                                                                   
fruitful because there is not  a significant amount of money.                                                                   
                                                                                                                                
Mr.  Marks  addressed Representative  Joule's  comment  about                                                                   
claw back  for the  state.  He  noted that those  investments                                                                   
could have  been deferred had it  been know that the  tax was                                                                   
changing.  He addressed the problem  of retroactive taxes and                                                                   
the rationale for having an effective date.                                                                                     
                                                                                                                                
4:36:30 PM                                                                                                                    
                                                                                                                                
Mr. Marks  referred to page 19.   The House Resources  CS has                                                                   
average annual revenues of $400  million more than the status                                                                   
quo and  $100 more than the  governor's bill.   He emphasized                                                                   
not to worry about low prices  under this scenario.  Slide 20                                                                   
shows  the  House CS  has  average  annual revenues  of  $1.3                                                                   
billion more than  the status quo and $400  million more than                                                                   
the  governor's  bill.    He  noted  that  this  scenario  is                                                                   
equivalent to state gas line revenues  at $5.00/mmbtu Chicago                                                                   
price without the gas line.                                                                                                     
                                                                                                                                
Mr.  Marks  related  that  Slide   21  shows  average  annual                                                                   
revenues  of  $100 million  less  that  status quo  for  both                                                                   
proposals.   The status quo  averages $112 million  annually.                                                                   
Slides 22 and 23 depict the same  information at $40 and $60.                                                                   
                                                                                                                                
4:39:50 PM                                                                                                                    
                                                                                                                                
Mr. Marks explained  the effective tax rate  under the status                                                                   
quo  is based  on the  wellhead  value, which  is the  market                                                                   
price, less transportation costs.   Under the status quo, the                                                                   
effective tax  rate is the ELF  times the 15  percent nominal                                                                   
rate.   Under PPT  the effective  tax rate  is the  severance                                                                   
tax, divided by the gross value at the point of production.                                                                     
                                                                                                                                
Slide 25  depicts the  effective severance  tax rate  under a                                                                   
low  volume scenario,  and  Slide 26  shows  the high  volume                                                                   
scenario.                                                                                                                       
                                                                                                                                
4:42:19 PM                                                                                                                    
                                                                                                                                
Mr. Marks defined state take as  the amount of money that the                                                                   
state  gets by  dividing the  severance tax  by the  economic                                                                   
rent.    This   is  a  regressive  system  under   all  three                                                                   
scenarios.     Slides  28-29   depict  the  three   scenarios                                                                   
regarding state take.                                                                                                           
                                                                                                                                
4:45:26 PM                                                                                                                    
                                                                                                                                
Mr.  Marks concluded  the presentation  highlighting how  PPT                                                                   
would  affect Cook  Inlet.   Slide  31 shows  how Cook  Inlet                                                                   
looked in 2005  with 8 producers producing both  gas and oil.                                                                   
He stated that  there were 3-4 oil producers  with 3 sizeable                                                                   
gas producers.                                                                                                                  
                                                                                                                                
Mr. Marks described Cook Inlet  gas as "gas prone" - about 80                                                                   
percent gas  on a barrel of  oil equivalent.  The  PPT impact                                                                   
on oil is  not going to be  significant.  The Cook  Inlet gas                                                                   
industry is evolving  and it is difficult to  determine which                                                                   
way it is moving.  There is new  increased investment.  It is                                                                   
difficult to define how investors will react.                                                                                   
                                                                                                                                
The  price inlet  picture in  Cook  Inlet is  uncertain.   He                                                                   
mentioned that gas  taxes on existing fields  may increase at                                                                   
higher prices.  He spoke to the  decision made by the RCA and                                                                   
how  that  affects contract  pricing.    It is  difficult  to                                                                   
determine what is going to happen.                                                                                              
                                                                                                                                
Under PPT,  on existing  fields where  the infrastructure  is                                                                   
old, there  may be an  increase in tax.   New fields  may see                                                                   
lower taxes.  He  spoke to the ability to modify  taxes.  The                                                                   
old  existing fields  are  based  on the  gas  ELF, which  is                                                                   
structured much simpler than the oil ELF.                                                                                       
                                                                                                                                
Mr. Marks  pointed out  that the  gas ELF  has been  in place                                                                   
since  1977  and it  has  not  changed  in almost  30  years.                                                                   
Anyone producing  gas has been  under the same  structure for                                                                   
35 years.                                                                                                                       
                                                                                                                                
Mr. Marks  referred  to Slide  34, which depicts  all of  the                                                                   
Cook Inlet  gas fields.   The  average ELF  is .5;  producing                                                                   
about 6,000  mcf per day.   The impacts  of the gas  ELF were                                                                   
not  included  in the  fiscal  note  because of  the  smaller                                                                   
fiscal impact and because of its uncertainty.                                                                                   
                                                                                                                                
Mr. Marks  referenced Slide 35  and the facts related  to the                                                                   
gas ELF.  He  estimated a crossover point at  about $5/mcf on                                                                   
existing fields,  and at $6/mcf,  an increase of  $25 million                                                                   
annually on existing fields.   The $25 million would decrease                                                                   
as  production decreases.   New  production  may see  reduced                                                                   
taxes unless prices were very high.                                                                                             
                                                                                                                                
4:55:15 PM                                                                                                                    
                                                                                                                                
Co-Chair Chenault recommended  that questions be given to his                                                                   
office.                                                                                                                         
                                                                                                                                
HB  488  was   heard  and  HELD  in  Committee   for  further                                                                   
consideration.                                                                                                                  
                                                                                                                                
ADJOURNMENT                                                                                                                   
                                                                                                                                
The meeting was adjourned at 4:56 PM.                                                                                           
                                                                                                                                
                                                                                                                                

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